WEBVTT NOTE Problems for the Fractional-Reserve Banker: The Criminal Law 1 00:00:00.000 --> 00:00:05.000 Problems for the Fractional Reserve Banker, the Criminal Law 2 00:00:05.000 --> 00:00:11.000 A deposit banker could not launch a career of fractional reserve fraud and inflation from the start. 3 00:00:11.000 --> 00:00:20.000 If I have never opened a Rothbard bank, I could not simply launch one and start issuing fraudulent warehouse receipts. 4 00:00:20.000 --> 00:00:22.000 For who would take them? 5 00:00:22.000 --> 00:00:29.000 First, I would have to build up over the years a brand name for honest 100% reserve banking. 6 00:00:29.000 --> 00:00:39.000 My career of fraud would have to be built parasitically upon my previous and properly built up reputation for integrity and rectitude. 7 00:00:39.000 --> 00:00:45.000 Once our banker begins his career of crime, there are several things he has to worry about. 8 00:00:45.000 --> 00:00:53.000 In the first place, he must worry that if he is caught out, he might go to jail and endure heavy fines as an embezzler. 9 00:00:53.000 --> 00:01:00.000 It becomes important for him to hire legal counsel, economists, and financial writers 10 00:01:00.320 --> 00:01:05.960 to convince the courts and the public that his fractional reserve actions are certainly 11 00:01:05.960 --> 00:01:11.780 not fraud and embezzlement, that they are merely legitimate entrepreneurial actions 12 00:01:11.780 --> 00:01:18.040 and voluntary contracts, and that therefore if someone should present a receipt promising 13 00:01:18.040 --> 00:01:24.080 and redemption in gold or cash on demand and if the banker cannot pay, that this is merely 14 00:01:24.080 --> 00:01:30.400 an unfortunate entrepreneurial failure rather than the uncovering of a criminal act. 15 00:01:30.400 --> 00:01:36.060 To get away with this line of argument, he has to convince the authorities that his deposit 16 00:01:36.060 --> 00:01:43.060 liabilities are not a bailment, like a warehouse, but merely a good faith debt. 17 00:01:43.060 --> 00:01:56.060 If the banker can convince people of this trickery, then he has greatly widened the temptation and the opportunity he enjoys for practicing fractional reserve embezzlement. 18 00:01:56.060 --> 00:02:12.060 It should be clear that if the deposit banker or money warehouseman is treated as a regular warehouseman or bailee, the money deposited for his safekeeping can never constitute part of the asset column on his balance sheet. 19 00:02:12.060 --> 00:02:27.060 In no sense can the money form part of his assets and therefore in no sense are they a debt owed to the depositor to comprise part of the banker's liability column as something stored for safekeeping. 20 00:02:27.060 --> 00:02:34.060 They are not loans or debts and therefore do not properly form part of his balance sheet at all. 21 00:02:34.060 --> 00:02:46.060 Unfortunately, since bailment law was undeveloped in the 19th century, the Banker's Council were able to swing the judicial decisions their way. 22 00:02:46.060 --> 00:02:56.060 The landmark decisions came in Britain in the first half of the 19th century, and these decisions were then taken over by the American courts. 23 00:02:56.060 --> 00:03:23.060 In the first important case, Carr v Carr, in 1811, the British judge Sir William Grant ruled that since the money paid into a bank deposit had been paid generally and not earmarked in a sealed bag, that is, as specific deposit, that the transaction had become a loan rather than a bailment. 24 00:03:23.060 --> 00:03:31.060 Five years later, in the key follow-up case of Devane's V. Noble, one of the Council argued correctly that 25 00:03:31.060 --> 00:03:42.060 a banker is rather a bailee of his customer's fund than his debtor because the money in his hands is rather a deposit than a debt 26 00:03:42.060 --> 00:03:46.060 and may therefore be instantly demanded and taken up. 27 00:03:46.060 --> 00:03:57.060 But the same Judge Grant again insisted that money paid into a banker's becomes immediately a part of his general assets, and he is merely a debtor for the amount. 28 00:03:57.060 --> 00:04:13.060 In the final culminating case, Foley v. Hill and others, decided by the House of Lords in 1848, Lord Cottenham, repeating the reasoning of the previous cases, put it lucidly, if astonishingly, 29 00:04:13.060 --> 00:04:43.060 The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with as he pleases. He is guilty of no breach of trust in employing it. He is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation. He is not bound to keep it or deal with it as the property of his principal. But he is, of course, answerable for the amount, because he has come to it. 30 00:04:43.060 --> 00:05:11.060 The argument of Lord Cottenham, and of all other apologists for fractional reserve banking, that the banker only contracts for the amount of money but not to keep the money on hand, ignores the fact that if all the depositors knew what was going on and exercised their claims at once, the banker could not possibly honor his commitments. 31 00:05:11.060 --> 00:05:21.060 In other words, honoring the contracts and maintaining the entire system of fractional reserve banking requires a structure of smoke and mirrors, 32 00:05:21.060 --> 00:05:30.060 of duping the depositors into thinking that their money is safe and would be honored should they wish to redeem their claims. 33 00:05:30.060 --> 00:05:40.060 The entire system of fractional reserve banking, therefore, is built on deceit, a deceit connived at by the legal system. 34 00:05:40.060 --> 00:05:47.420 A crucial question to be asked is this, why did grain warehouse law, where the conditions 35 00:05:47.420 --> 00:05:55.420 of depositing fungible goods are exactly the same and grain is a general deposit and not 36 00:05:55.420 --> 00:06:02.700 an earmarked bundle, develop in precisely the opposite direction? 37 00:06:02.700 --> 00:06:07.900 Why did the courts finally recognize that deposits of even a fungible good in the case 38 00:06:07.900 --> 00:06:19.900 The use of grain are emphatically a bailment, not a debt. Could it be that the bankers conducted a more effective lobbying operation than did the grain men? 39 00:06:19.900 --> 00:06:32.900 Indeed, the American courts, while adhering to the debt-not-bailment doctrine, have introduced puzzling anomalies which indicate their confusion and hedging on this critical point. 40 00:06:32.900 --> 00:06:39.620 Thus, the authoritative law reporter, Michie, states that in American law, a bank deposit 41 00:06:39.620 --> 00:06:46.080 is more than an ordinary debt, and the depositor's relation to the bank is not identical to that 42 00:06:46.080 --> 00:06:55.140 of an ordinary creditor. Michie cites a Pennsylvania case, People's Bank v. LeGrand, which affirmed 43 00:06:55.140 --> 00:07:02.020 that a bank deposit is different from an ordinary debt in this, that from its very nature it 44 00:07:02.020 --> 00:07:08.820 It is constantly subject to the check of the depositor and is always payable on demand. 45 00:07:08.820 --> 00:07:16.280 Also, despite the law's insistence, following Lord Cottenham, that a bank becomes the absolute 46 00:07:16.280 --> 00:07:24.620 owner of money deposited with it, yet a bank still cannot speculate with its depositors 47 00:07:24.620 --> 00:07:54.620 Why aren't banks treated like grain elevators? That the answer is the result of politics rather than considerations of justice or property rights is suggested by the distinguished legal historian, Arthur Nussbaum, when he asserts that adopting the contrary view that a bank deposit is a bailment, not a debt, would lay an unbearable burden upon banking business. 48 00:07:54.620 --> 00:08:01.340 No doubt bank profits from the issue of fraudulent warehouse receipts would indeed come to an 49 00:08:01.340 --> 00:08:07.420 end as do any fraudulent profits when fraud is cracked down on, but grain elevators and 50 00:08:07.420 --> 00:08:12.900 other warehouses, after all, are able to remain in business successfully. 51 00:08:12.900 --> 00:08:16.700 Why not genuine safe places for money? 52 00:08:16.700 --> 00:08:23.780 The Bank of Amsterdam, which kept faithfully to 100 percent reserve banking from its opening 53 00:08:23.780 --> 00:08:32.300 In 1609, until it yielded to the temptation of financing Dutch wars in the late 18th century, 54 00:08:32.300 --> 00:08:39.300 financed itself by requiring depositors to renew their notes at the end of, say, a year, 55 00:08:39.300 --> 00:08:43.360 and then charging a fee for the renewal. 56 00:08:43.360 --> 00:08:48.540 To highlight the essential nature of fractional reserve banking, let us move for a moment 57 00:08:48.540 --> 00:08:53.380 away from banks that issue counterfeit warehouse receipts to cash. 58 00:08:53.380 --> 00:09:06.380 Let us assume, rather, that these deposit banks, instead, actually print dollar bills, made up to look like the genuine article, replete with forged signatures by the treasurer of the United States. 59 00:09:06.380 --> 00:09:11.380 The banks, let us say, print these bills and lend them out at interest. 60 00:09:11.380 --> 00:09:19.380 If they are denounced for what everyone would agree is forgery and counterfeiting, why couldn't these banks reply as follows? 61 00:09:19.380 --> 00:09:26.380 Well, look, we do have genuine, non-counterfeit cash reserves of, say, 10 percent in our vaults. 62 00:09:26.380 --> 00:09:34.380 As long as people are willing to trust us and accept these bills as equivalent to genuine cash, what's wrong with that? 63 00:09:34.380 --> 00:09:41.380 We're only engaged in a market transaction, no more nor less than any other type of fractional reserve banking. 64 00:09:41.380 --> 00:09:50.380 and what indeed is wrong about this statement that cannot be applied to any case of fractional reserve banking.